An Introduction to Chargebacks, Part II: Fighting a Chargeback

How to fight a chargeback

As mentioned in our previous article, even businesses with the most proactive security policies in place can fall prey to chargebacks, especially e-commerce merchants. A strong documentation policy, proper display of terms and conditions, and impeccable customer service can limit most chargebacks – but not all. While the burden of proof lies upon the merchant in most cases, it is not impossible to win a dispute. There are some methods that may lessen the frequency of a chargeback occurring and minimize time spent handling those that do occur.

The bank and the merchant involved in a chargeback dispute

Each acquiring bank has its own protocol for handling chargebacks, but all protocols must be compliant with Visa and MasterCard regulations. The general chargeback process is as follows:

  1. The cardholder disputes a charge on their credit card statement by contacting their bank. The cardholder states that they did not authorize the transaction, they were unhappy with the product or service, or they do not recognize the charge.
  2. The issuing bank will send transaction information to the processor with one of the chargeback codes discussed in the previous article. This “reason code” gives merchants an opportunity to counter the chargeback claim with evidence that the transaction was legitimate. The issuing bank also credits the cardholder with the disputed amount and the processor, then responsible for those funds, takes them from the merchant. This does not mean the cardholder has “won” the dispute. This money is a credit from their bank designed to prevent any issues that may come about from the charge remaining on the card. If the cardholder’s dispute is found to hold no merit, the processor will reverse the credit and the cardholder will again be held responsible for the transaction. Refunding a card after a chargeback has been filed will result in a double loss for the merchant. The best course of action is to follow the directions sent by the processor to dispute the chargeback.
  3. The processor then sends a retrieval request with a reason code to the merchant requesting more information. There is a $5-20 fee associated with this request that is billed to the merchant regardless of the outcome of the dispute. At this stage, a chargeback fee is also billed to the merchant, typically in the range of $25-35, although this amount may be higher depending on the processor. Keep in mind, however, that if a chip card is swiped on a non-EMV terminal, the merchant may automatically lose the chargeback dispute. This is due to the new EMV migration regulations effective October 2015.
  4. If the merchant has taken fraud prevention steps, there should be supporting documentation to verify that the transaction is legitimate. This can include the original order information, signed delivery receipts, or e-mail communication between the cardholder and the merchant’s customer service. Once all of the supporting documentation is gathered, the merchant submits this information to the processor.
  5. The processor’s chargeback and risk departments will review the dispute once again and either decide in favor of the merchant or the cardholder. The issuing bank may also re-code the chargeback or file a second chargeback if new information about the same transaction is uncovered.

Chargebacks are meant to be taken seriously. The processors and card brands such as Visa and MasterCard have major consequences for chargebacks. In the worst-case scenario, a merchant could lose the product, the sale, as well as be responsible for various fees billed by the card brands and processors. In addition to fees levied against the merchant, if a merchant’s chargeback ratio exceeds 2% of total sales or transaction volume at any given time, the business’ merchant account will be shut down. This 2% rule is a universal rule, but some processors may allow more depending on the business type and ticket sizes.

There are also chargeback monitoring programs, such as Verifi or Ethoca, in which a business may be placed if they exceed a 2% chargeback ratio. Other processors may hold onto a “rolling reserve,” a percentage of sales withheld for a specific time frame to cover for any potential chargebacks or fraud.

Chargeback Monitoring Program

While chargebacks may seem daunting, and they certainly are nothing to scoff at, they are not immediate losses. Proper prevention methods can limit the number of chargebacks received and keeping all transaction, order, and communication documentation can successfully defend a merchant. In the case of chargebacks, the best offense is a good defense.

For more information about chargebacks, view the first installment in our Introduction to Chargebacks series. If you have received a chargeback and have any questions or concerns, please call our office directly at 877-997-9473 or send us an email.